Sponsor timidity: got to be in it to win it

Data Insight ECM Explorer 4 November

Sponsor timidity: got to be in it to win it

Ahead of the football World Cup in Qatar later this month, financial sponsors used to racking up big scores on equity capital markets are like a team two-nil down with 89 minutes played. They’ll have to attack at some point.

So far this year, private equity has largely absented itself from the field of play amid global stock market volatility. Only 7% of proceeds raised via EMEA ECM transactions in 2022 has come from sponsor sales, according to Dealogic.

Indeed, this haul of just USD 7bn is down around 90% from the USD 71bn of sponsor-backed ECM issuance across the whole of 2021, when around 20% of all ECM deals in EMEA were connected to a private equity house.

Sponsors have scarcely been rushing to exit assets through M&A, it has to be said; their proceeds from M&A transactions across EMEA are down around 46% year-to-date, according to Dealogic.

ECM bankers have told ECM Explorer that many sponsor clients are waiting for underlying conditions to improve before tapping stock markets.

Equity volatility has led to delays of landmark IPOs like EQT [STO:EQT]-backed Swiss skincare company Galderma, which had been slated to be one of the biggest potential listings in Europe at the beginning of 2022.

Despite the quick-and-dirty nature of accelerated transactions, with far less exposure to wild turns in the market than the lengthy IPO pre-marketing and bookbuild states, follow-on volumes have also been grim.

Private equity firms continuing staged exits post-IPO can typically be counted on as one of the main drivers in the European blocks market.

Back in the game

But bankers say they expect sponsors to start considering follow-on sales below prices established at the IPO just to start generating extra capital to make new investments. Tightened debt markets are forcing LBO financing to have a larger slug of equity.

Some of the largest names in global private equity have been keen European ECM issuers over the past few years.

Since 2014, Europe’s most active sponsor in terms of ECM deal activity has been sovereign wealth fund GIC PTE Ltd, according to Dealogic data, at a staggering USD 16.5bn. Admittedly, it’s a bit of an outlier. The vast majority – around USD 13.5bn – of that has come from follow-ons, mainly through its participation Spanish telecoms company Cellnex’s [BME:CLNX] rights issues. Effectively, it’s been putting money into ECM as a way of supporting Cellnex’s bolt-ons. GIC was a seller however in the USD 2.6bn IPO of Allfunds Group [AMS:ALLFG] in Amsterdam in 2021.

Permira, which comes in second, has mostly used ECM to exit positions and has a far more even split between blocks and IPOs at USD 8.8bn and USD 6.2bn, respectively. Its largest deals have been the USD 2.7bn equivalent of Polish retailer Allegro [WSE:ALE] in 2020 and the 2019 IPO of Germany’s Teamviewer [ETR:TMV].

EQT has sold around USD 7.5bn of equity in the follow-on market since 2014, and USD 6.9bn through IPOs; CVC has sold USD 9.5bn through follow-ons and USD 4.2bn in the IPO market.

Advent Capital has sold more equity through IPOs at USD 8.8bn, notably the listing of Poland’s InPost [AMS:INPST] in 2021 and Worldpay in 2015, than through follow-ons at USD 3.5bn. It has also sponsored three convertible bonds worth around USD 1.1bn since 2014.

With the US Federal Reserve sticking to its rate hike plan and the Bank of England hiking 75bps yesterday (3 November), sponsors may have to resign themselves to lower equity valuations for their assets.

Like ageing midfielder Roy Kent from Apple TV’s Ted Lasso, whose destroyed knee limits his ability on the pitch, it may not be ideal conditions to get out and score - but you need to play to win.

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